ALK stock has seen a 30% fall from levels of $50 in early January 2021 to around $35 in early September 2024, vs. an increase of about 50% for the S&P 500 over this roughly three-year period.
ALK has had a poor run, with the stock losing value in each of the last three years. Returns for the stock were 0% in 2021, -18% in 2022, and -9% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that ALK underperformed the S&P in 2021 and 2023.
Alaska Air reported revenue of $2.9 billion in Q2'24, 2% higher than the prior-year quarter's figure. Alaska reported a 6% rise in available seat miles, while the load factor was down 290 bps, and yield remained flat. Fuel costs per gallon increased by 3% y-o-y. Pre-tax consolidated margin stood at 15.8% in Q2'24 vs. 18.3% in the prior-year quarter. This meant that the earnings contracted to $2.55 on a per-share and adjusted basis, compared to $3.00 per share in Q2'23.
Below are key drivers of Alaska Air Group that present opportunities for upside or downside to the current Trefis price estimate.
Fuel Costs % Of Passenger Revenues: Fuel expenses are the largest operating expense incurred by an airline. Alaska Air's fuel costs as a percentage of its passenger revenues increased from 23.2% in 2019 to 27.7% in 2023. We expect this metric to fall marginally to around 25% by the end of our forecast period.
If, however, fuel costs % of Passenger Revenues stay at 30% by the end of the Trefis forecast period, instead of the current forecast, then there could be a downside of more than 25% to Trefis price estimate for Alaska Air Group's stock.
Alaska's Passenger Yield: Alaska Air's Passenger Yield decreased from $0.145 in 2019 to $0.166 in 2023. We forecast it to rise to $0.206 by the end of the Trefis forecast period.
However, if passenger fares rise more than anticipated — either due to sustained high crude prices or strong growth in demand for flights — and take the yield to $0.245 by the end of the Trefis forecast period, then there could be a potential upside of approximately 25% to Trefis price estimate for Alaska Air Group's stock.
Alaska Air Group was founded in 1985, and it has two principal subsidiaries: Alaska Airlines (Alaska) and Horizon Air (Horizon). Through these subsidiaries, Alaska Air Group provides passenger air service to more than 29 million passengers annually to more than 100 destinations. It also provides freight and mail services, primarily to and within the state of Alaska and on the West Coast. Although Alaska Airlines and Horizon operate as airlines, their business plans, competition, and economic risks differ substantially. Alaska operates on longer distance routes using an all-Boeing 737 fleet, while Horizon operates on shorter route networks using an all-Q400 aircraft fleet.
With regard to the airline's service network, Alaska offers extensive north/south service within the western U.S., Canada, and Mexico, as well as passenger and dedicated cargo services to and within the state of Alaska. It also provides long-haul east/west services to Hawaii and many cities in the mid-continental and eastern U.S. This is primarily from Seattle, where the carrier has its largest concentration of departures. However, it does offer long-haul departures from other cities as well.
Horizon Air is the largest regional airline in the Pacific Northwest and contributes most of the Alaska Air Group's regional revenue passengers. It serves many cities in six states, five destinations in Canada, and two in Mexico.
Fuel expenses constitute the single largest cost head for airlines, including Alaska. This makes airlines highly vulnerable to hikes in crude oil prices. For Alaska, fuel costs constitute about a quarter of its total operating expenses. Alaska Air engages in fuel price hedging to reduce its vulnerability to fuel price volatility.
The demand for flights is highly correlated to global economic growth. Thus, a decline in economic growth, or a recession, reduces the demand for flights, which impacts passenger traffic for airlines. On the contrary, steady growth in the global and the US economy grows demand for air travel, allowing airlines to raise their airfares, occupancy rates, and profits.
Many airlines, including Alaska, are figuring out ways to grow their top lines through ancillary heads such as baggage fees, access to onboard Wi-Fi, food and drinks, etc. Accordingly, airlines are investing in enhancing their product offerings, including in-flight Wi-Fi and other entertainment options, improved lounge facilities, and extra-legroom seats.
According to a recent study, North American airlines collectively produce one of the largest streams of ancillary revenues compared to other regions. Most of the increase is attributable to stronger merchandising efforts by the carriers and the addition of more A la carte services for sale.
During the past decade, low-cost carriers gained a significant market share. Going forward, as travel demand grows, it is inevitable that these low-cost carriers will take a large share of this incremental demand.
The US airline industry has seen many mergers and acquisitions in the last decade, including the five big combinations of US Airways and America West, Delta and Northwest, United and Continental, Southwest and AirTran, and American and US Airways.
The industry's consolidation has improved the profitability of all airlines by restraining the capacity addition by these airlines. Earlier, individual airlines were adding capacity at higher rates to grow their market shares, which resulted in an oversupply of seats, reducing the margin and profits of all carriers.
Going forward, we expect the industry to remain profitable as long as airlines add capacity with discipline.
